Quoting the Crisis21/09/2009
“ We show in our paper that inconvertible banknotes emerge endogenously in a model of money and banking. The value of these notes is stable as long as there is competition with other forms of money, such as silver or notes issued by other banks. Competition imposes discipline on the issuing banks, because agents can always move to other forms of money. However, if some bank becomes the dominant issuer of notes (as was the case many times) and if silver is scarce, these notes face little competition. Thus, the issuing bank has incentive to over-issue notes, which might lead to inflation. This happened in several episodes of free banking and ultimately led to government intervention. „
Economist’s View: Toxic Assets in the 18th Century (via nonolet)
Quote posted at 11:42
